How's the 600 billion going to affect the market and inflation?

[novaman]

Now that the Fed is committing to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling U.S. economy, what should we expect in the markets over the next few years and how should we be positioning our portfolios?

 

[Meadbh]

Devaluation of the US$?
Invest abroad?

 

[dex]

Buy an RV an plan to travel in the USA. Foreign travel will be expensive.

 

[audreyh1]

Bonds will be happy for a while longer. Maybe another year. Until CPI inflation shows up, anyway.

Agree with dollar continuing to drop. That is actually positive for the US economy. But as far as investments are concerned you might want to have a healthy allocation to foreign equities.

Audrey

 

[DblDoc]

Now that the Fed is committing to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling U.S. economy, what should we expect in the markets over the next few years and how should we be positioning our portfolios?

Broadly diversified, low cost index funds and stay the course. Oh wait. That's no different than yesterday .

DD

 

[LARS]

Agree with dollar continuing to drop. That is actually positive for the US economy.

I question this standard response to dollar devalutation. So little of the economy is driven by exports as we've exported manufacturing overseas.

I believe that exports are no more than 5% of GDP and of course the offset to decreased costs of exports is the increased costs of imports, which are far more substantial and have the potential to be far more damaging to the economy than any offsetting benefit from exports.

Now, a good portion of our imports are from China who, at least for now, appear committed to pegging the Yuan to the $. To a lesser extent, the same could be said for Japan. So that's okay, but not all goods are from countries determined to devalue with the dollar and then of course there is the elephant in the room: oil.

The other issue is at some point foreign central banks are going to have to allow their currencies to appreciate against the $ or risk out of control inflation. When/if that happens, imports will get very expensive.

 

[keegs]

I question this standard response to dollar devalutation. So little of the economy is driven by exports as we've exported manufacturing overseas.

I believe that exports are no more than 5% of GDP and of course the offset to decreased costs of exports is the increased costs of imports, which are far more substantial and have the potential to be far more damaging to the economy than any offsetting benefit from exports.

Now, a good portion of our imports are from China who, at least for now, appear committed to pegging the Yuan to the $. To a lesser extent, the same could be said for Japan. So that's okay, but not all goods are from countries determined to devalue with the dollar and then of course there is the elephant in the room: oil.

The other issue is at some point foreign central banks are going to have to allow their currencies to appreciate against the $ or risk out of control inflation. When/if that happens, imports will get very expensive.

Certainly a correlation between the dollar and oil prices. It's been pretty obvious at the pump lately. In my view higher oil prices are a mixed bag.

The markets are up 3% over the past month and car sales are up as well. I've been hearing that QE2 is providing a weath effect. Whether it has legs remains to be seen

 

[unclemick]

Broadly diversified, low cost index funds and stay the course. Oh wait. That's no different than yesterday .

DD

And don't miss football season.

heh heh heh -

 

[Gone4Good]

I believe that exports are no more than 5% of GDP and of course the offset to decreased costs of exports is the increased costs of imports, which are far more substantial and have the potential to be far more damaging to the economy than any offsetting benefit from exports.

What I think you're forgetting is that imports subtract from GDP, just as exports add to GDP. If the dollar declines in value, not only do our products become more competitive overseas, but domestic producers become more competitive with their international counterparts at home as well.

 

[keegs]

And our oil imports, making up 2/3 of our trade defict, puts pressure on the dollar.

 

[traineeinvestor]

I question this standard response to dollar devalutation. So little of the economy is driven by exports as we've exported manufacturing overseas.

....


The other issue is at some point foreign central banks are going to have to allow their currencies to appreciate against the $ or risk out of control inflation. When/if that happens, imports will get very expensive.

The historical evidence for the impact of currency devaluation is mixed. There will be winners and losers when a country's currency depreciates.

The latter point is highly topical here in Hong Kong where our currency is pegged to the USD. The currency peg combined with totally free capital movements has resulted in ultra low interest rates (I pay less than 1% on my mortgage), a flood of hot money, rising property prices (there is some talk of a bubble) and rising inflation generally. Unless they change the peg to the USD there is very little that can be done to prevent these problems. (Of course, in the short term they are very nice problems to have.....)

 

[haha]

The other issue is at some point foreign central banks are going to have to allow their currencies to appreciate against the $ or risk out of control inflation. When/if that happens, imports will get very expensive.

At some point? Have you noticed where the Euro is lately? $1.43. Last summer it was about $1.20. I think we have reached and passed that point whereof you speak. The US dollar index also has fallen from 88+ to 76- just since last June. And there is no sign that the deterioration is likely to end anytime soon.

Ha

 

[obgyn65]

I agree with Ha on this.

The US dollar index also has fallen from 88+ to 76- just since last June. And there is no sign that the deterioration is likely to end anytime soon.

Ha

 

[TargaDave]

how should we be positioning our portfolios?

For what it's worth we're now up to almost 40% precious metals. DCAing in since 2004. Biased to silver. DCAing out of bonds and broad indexes more recently. Another 30% cash and balance in emerging equity/currency, other commodities including energy, a few short bonds, solid dividend payers, etc. BTW, no mre's, shotguns or oil barrels. Have studied Berstein and precious metals fundamentals. No intent to cost average out of the metals until those fundamentals change, but I'm sure the time will eventually come. Just our take on things. Good luck to all in these unusual tmes!

 

[FreqFlyer]

I question this standard response to dollar devalutation. So little of the economy is driven by exports as we've exported manufacturing overseas.

I believe that exports are no more than 5% of GDP and of course the offset to decreased costs of exports is the increased costs of imports, which are far more substantial and have the potential to be far more damaging to the economy than any offsetting benefit from exports.

Per Wikipedia..

The United States is the world's largest manufacturer, with a 2007 industrial output of US$2.69 trillion. In 2008, its manufacturing output was greater than that of the manufacturing output of China, India, and Brazil combined, despite manufacturing being a very small portion of the entire US economy as compared to most other countries.[90]

 

[FreqFlyer]

And our oil imports, making up 2/3 of our trade deficit, puts pressure on the dollar.

I agree. If one is for a strong dollar than we have to find a solution to our addiction to foreign oil.

 

[tryan]

I never understood how loaning yourself money solves anything.

Looks like just an excuse to print more money ... short sighted IMO (but what do you expect from the feds).

 

[Gone4Good]

I never understood how loaning yourself money solves anything.

Looks like just an excuse to print more money ... short sighted IMO (but what do you expect from the feds).

It's not an excuse to print money. It is the process by which they attempt to print more money.

It didn't really work in Japan, though, the cash just sat in the banks.

 

[LARS]

At some point? Have you noticed where the Euro is lately? $1.43. Last summer it was about $1.20. I think we have reached and passed that point whereof you speak. The US dollar index also has fallen from 88+ to 76- just since last June. And there is no sign that the deterioration is likely to end anytime soon.

Ha

The Euro is not predominately the issue. It is not been pegged to the $. Moreover, imports from China, Japan and the Pacific Rim (where central banks are pegging to the dollar for now) dwarf Euro imports, especially for the bottom two thirds, or more, of consumers who are not benefiting at all from the FED induced melt up in the stock market.

The hell of what I speak for the US consumer will come IF China (and a lesser extent Japan) throws in the towel and worries about domestic inflation over domestic employment. Will it happen, I don’t know. God knows the Chinese have been willing to manipulate their currency (and by doing so invest trillions in depreciating $s) far longer than I would have expected. Still, at some point I suspect a forced policy change due to domestic issues.

And there is still the issue of oil…

 

[LARS]

The latter point is highly topical here in Hong Kong where our currency is pegged to the USD. The currency peg combined with totally free capital movements has resulted in ultra low interest rates (I pay less than 1% on my mortgage), a flood of hot money, rising property prices (there is some talk of a bubble) and rising inflation generally. Unless they change the peg to the USD there is very little that can be done to prevent these problems. (Of course, in the short term they are very nice problems to have.....)

Exactly the point. The investment question of the century is if and when this occurs... Get this correct and you will be able to coin money.

 

[novaman]

I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars

 

[Purron]

From the WSJ:

"The Federal Reserve, in a dramatic effort to rev up a "disappointingly slow" economic recovery, said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth."

Fed to Buy $600 Billion of Treasurys - WSJ.com

How much lower can rates go? Current averages from Bankrate dot com:
30 year fixed rate mortgage 4.24%
1 year CD 1.12%

Rates are already at historically low levels and it hasn't jumpstarted the economy yet.

 

[Dawg52]

I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars

Hope the new allocation doesn't cost you more money. But I admit, I know nothing about nothing.

 

[REWahoo]

Nova, I feel your pain, having been down that road a few years ahead of you. I suppose each of us has to learn that painful and expensive lesson the hard way: no one, and I mean absolutely no one, can consistently know the direction the market will take, when it will take it, or how long it will head that way.

Finding an AA you can live with and rebalancing when it gets out of whack is far from perfect but it sure beats guessing wrong.

 

[haha]

The Euro is not predominately the issue. It is not been pegged to the $. Moreover, imports from China, Japan and the Pacific Rim (where central banks are pegging to the dollar for now) dwarf Euro imports, especially for the bottom two thirds, or more, of consumers who are not benefiting at all from the FED induced melt up in the stock market.

The hell of what I speak for the US consumer will come IF China (and a lesser extent Japan) throws in the towel and worries about domestic inflation over domestic employment. Will it happen, I don’t know. God knows the Chinese have been willing to manipulate their currency (and by doing so invest trillions in depreciating $s) far longer than I would have expected. Still, at some point I suspect a forced policy change due to domestic issues.

And there is still the issue of oil…

I am not exactly sure what you are saying. Precisely because the Euro trades freely, its movements against the dollar are meaningful. Up another cent this morning, to $1.44